Tuesday, January 31, 2017

Amgen’s Transfer Pricing (Psst – don’t got there)

Amgen CEO Robert Bradway told President Trump at today's White House meeting that his company is adding 1,600 jobs in the U.S. this year.

Amgen had $21,662 million in sales in 2015 with $7978 million in profits. Its worldwide taxes were only $1039 million for an effective tax rate of only 13 percent. How did they pull the trick off? Their 10-K filing is a little sparse in information but does admit:

The effective tax rates for the years ended December 31, 2015, 2014 and 2013, are different from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States.

Did the White House discuss this massive base erosion to tax havens with no repatriation of earnings? Of course one has to wonder about their transfer pricing profile. All I could get from their 10-K was:

We perform most of our bulk manufacturing, formulation, fill and finish activities in our Puerto Rico facility and also conduct finish activities in the Netherlands. We also utilize third-party contract manufacturers to supplement the bulk, formulation, fill, and/or packaging of certain Amgen principal products ... We operate distribution centers in the United States—principally in Kentucky and California—and the Netherlands for worldwide distribution of the majority of our commercial and clinical products. We also use third-party distributors to supplement distribution of our products worldwide ... We have major R&D centers in several locations throughout the United States (including Thousand Oaks and San Francisco, California and Cambridge, Massachusetts), Iceland and in the United Kingdom, as well as smaller research centers and development facilities globally.

So we have three basic functions here: (1) production offshore; (2) local distribution; and (3) R&D done in the U.S. Amgen’s profit margin is near 37 percent, which should tell us most of its profits are attributable to its product intangibles, which were developed here. And yet most of the profits are sourced to tax havens. As we spend so much time debating the various aspects of the Destination-Based Cash Flow Tax, multinationals like Amgen are very happy that we are not discussing their transfer pricing.

2 comments:

brad setser
said...

nice post PGL

couple of points -- as no doubt you know, Puerto Rico is offshore if you want it to be (e.g. no US corporate income tax until profits repatriated, can operate your puerto rican operations as a foreign controlled company etc). but was still interested in the use of PR and the Netherlands. Personal interest, given my work on Puerto Rico, as PR has been losing out to Ireland. but key point is that export income from PR can be tax deferred indefinitely as I understand it.

and i am increasingly interested in how destination based cash flow taxation would change firms incentives. Export income is entirely untaxed, so effective tax rate would be what -- 20% of profits on US sales and 0% of profits on global sales, so still very low. Actually I wonder if the reform might even reduce Amgen's US tax, as export income is excluded from revenues, potentially creating a tax loss on the portion of RnD that generates global revenues (US costs, zero taxable income on exports, = tax loss on exports i think, but i am still not sure on this angle). curious what you think

Brad - great points on transfer pricing and that Destination Based Cash Flow Tax. I have tried to address this a bit - see my recent post on Disney/Starbucks transfer pricing and an older post with the Trump Toaster Oven example.

For the day job I have been asked to write a paper on this. I thought I was 80% done but got yesterday an interesting paper from some folks at Economic Partners which is having me rethink.

I hear the Senate is concerned that the House is steam rolling this idea and they want to have hearings. This debate will keep us busy through the summer.